Should We Call It a Comeback? Q1 Oil & Gas Industry Update
Global sanctions, OPEC cuts, technological advances, a sleeper capital markets landscape and recent dramatic consolidation efforts dominated oil and gas headlines in early 2019, as the industry appeared to make a swift recovery following a rocky end to last year. But are crude prices on the upswing or is it too soon to call it a comeback?
In December, oil prices experienced a major drop, falling to as low as $42.36 per barrel. Fortunately, this downturn was seemingly short lived, as oil prices began to recover in January.
This upturn was bolstered by several key industry trends that continued into 2019: the increased use of advanced extraction technology to improve production volumes and margins, as well as an optimist rush to “Permania”. Meanwhile, protests in Venezuela and sanctions against Iran have alternatively reduced supply, driving commodity prices higher. Recent trade tariffs against China are expected to have a further impact, as questions remain regarding future global demand.
Expectations are that $75/bbl oil would be OPEC’s ideal price point to balance its budget and make up for the shortfall in late 2018, despite US political attempts at disrupting those cuts to keep gas pump pricing low headed into an election cycle. As such, OPEC is expected to continue holding back in the near term.
Q1 2019 Metrics
The US now produces the most crude oil in the world at 12.1 million barrels per day
$45.52 - $60.73
NYMEX WTI crude traded in a range from $45.52 to $60.73
The energy sector asset class posted a 19.49% gain over 2018
Total Natural Gas production of 95.53 BCF per day
The ending US rig count was 816
Gasoline demand grew by 1.0% year over year to 8.9M barrels per day
Total petroleum inventories 4.1% above the 5-year average
At Riveron, we have seen many of our clients who are eager to access capital in the public markets recently tap the brakes so that they can assess the direction in which commodity prices are headed. Rising crude drives optimism in the market and encourages deal making. But between the decline in Q4 2018 and pricing in the $50 – $60/bbl range in Q1 2019, market confidence for the balance of 2019 is weak. The fight over Anadarko that just played out between Chevron and Occidental has many pundits believing a new round of consolidation, particularly in the Permian Basin, may be coming. Only time will tell.
So where is the industry headed? Absent any changes to OPEC’s current plan, Venezuela’s blackouts, a more heavily sanctioned Iran, the US production party, negative impacts due to Chinese tariffs or a global economic meltdown, we expect to see commodity prices on a slow uptick trend in the rest of Q2 and beyond.
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The new lease accounting standard (ASC 842) is effective for calendar year-end public companies on January 1, 2019.